Takeaway: ICSC sales ebb again. AMZN streaming hardware late to party. UA split. DSW results worse than they appear. WMT challenging GME – good luck.
EVENTS TO WATCH
- PSUN - Earnings Call: Tuesday 3/18, 4:30pm
- GES - Earnings Call: Wednesday 3/19, 4:30pm
- TLYS - Earnings Call: Wednesday 3/19, 4:30pm
- WTSL - Earnings Call: Thursday 3/20, 5:00pm
- NKE - Earnings Call: Thursday 3/20, 5:00pm
- TIF - Earnings Call: Friday 3/21, 8:30am
ICSC - Chain Store Sales Index
Not a disaster by any means, but last week's +2.1% reading gave us a glimmer of hope. This week we drifted back down to +1.5%. Keep in mind, as outlined in the second chart below, that we're about to go against a 10-week run last year where sales growth was well below 2012 levels. In other words, we have an easy comp. We hope we'll see trends accelerate (but we hate relying on hope).
DSW - 4Q13 Earnings
The headline number was pretty decent relative to expectations. But after updating the model, the trajectory of DSW's business left us less than inspired. After three quarters of either the sales/inventory spread or margins improving, both took a nosedive this quarter. One thing that seriously bugs us is that DSW called out OmniChannel investments -- almost as if they are one-time in nature. Since when is it ok to single out investments in any area and expect the Street to strip them out of results? Investments are what they are -- money spent to accelerate profit growth in the future. You can't strip 'em out. We certainly won't.
AMZN - Amazon to Ship Video-Streaming Device in April
- "Amazon.com Inc. will begin shipping its long-awaited video-streaming device in early April, through its website as well as retailers including Best Buy Co. and Staples Inc., said people familiar with the company’s plans."
- "The Amazon device will carry a variety of apps available on Roku Inc. and Apple Inc. set-top boxes and run on a version of Google Inc.’s Android software, like Amazon’s tablet computers, these people said. Roku’s most popular apps include video services Netflix and Hulu Plus and music service Pandora, as well as Amazon’s own video-streaming service."
- "Pricing remains unclear, though the people familiar with the e-commerce giant’s plans said the device likely would come with incentives available to members of Amazon’s Prime streaming video and shipping program."
Takeaway: This is overdue for Amazon. You can buy a box from Apple, Roku and even Google (through a partnership with Sony). There'll be a real appetite for a competing product from AMZN -- especially if it leverages Prime from streaming content. One thing we wonder is if it is too late to the party. Walk into a Best Buy, and half the TVs on the wall are 'smart TVs' which already have the box embedded in the unit. No need to have Apple, Roku or Amazon there. Soon those 'smart TVs' will be 'dumb TVs' and everybody will have them. Apple seems to have this one right with their (worst secret in consumer electronics) soon-to-be move to bypass the little black box and go direct to a branded TV set.
UA - Under Armour Announces A Two-For-One Stock Split
- "Under Armour, Inc. today announced that its Board of Directors has approved a two-for-one stock split of its outstanding common stock."
"The additional shares issued as a result of the stock split will be distributed on or about April 14, 2014 to stockholders of record on March 28, 2014."
Takeaway: While I never quite understood the logic of a stock split, the reality is that there will always be some investors who think that a $60 stock is half as expensive as a $120 stock.
WMT, GME - Newest Player in Used Videogames: Wal-Mart
- "Wal-Mart Stores Inc. is making a play for the used videogame business, a move that could bring in new customers while rankling GameStop Corp., which has long dominated the market."
- "Starting next week, the world's largest retailer will allow shoppers to trade in used videogames for anything from groceries to gadgets across 3,100 of its stores. Customers will receive gift cards ranging from a few dollars to more than $35, based on the value of the games they turn in. Those cards can be redeemed in stores and online."
- "Wal-Mart itself ran a smaller trade-in program in 2009 where it allowed customers to sell used games through kiosks in certain stores, but the retailer failed to make it work. This time, Wal-Mart has teamed up with CExchange Inc., an electronic trade-in and recycling company based in Carrollton, Texas, which also works with RadioShack Corp. and eBay Inc."
Takeaway: We give WMT credit for going the used game route, and they could prove disruptive to GME -- to an extent. But the reality is that it is a tough business, and it took GME a very long time to get it right. It is harder to manage inventory in this category than almost any other in retail. There's no way Wal-Mart can do it as well as GameStop. One of the key reasons is that you need consistent volume of gamers that view your store as a source for the content that they want. GME has that steady flow of traffic -- it is the destination for gamers. Only after it established itself as the mecca for Video Games could it build a used game business. Seems premature for WMT.
Retailers Face Big Hurdles in Bridging the “Omni-Channel Commerce Gap,” According to new Research from Accenture and hybris
- "Organizational, operational and technology challenges are hampering retailers’ efforts to meet customers’ demand for a seamless shopping experience across all channels and touch points, according to a new research study from Accenture…"
- "Retailers view omni-channel maturity as a key brand differentiator for their companies, and improving their ability to provide customers with a seamless shopping experience across all channels, as a top priority, according to the study, 'Customer Desires Vs. Retailer Capabilities: Minding the Omni-Channel Commerce Gap,' conducted by Forrester Consulting. However, the study shows that nearly all – 94 percent – of retail decision makers surveyed as part of the research said that their companies face significant barriers to becoming an integrated omni-channel company."
- "The survey also found that 71 percent of the shoppers expect to view in-store inventory online, and 50 percent expect to buy online and pick up their purchase in a physical store. Yet, only one third (36 percent) of the retail decision makers surveyed said that their companies are able to provide customers with in-store pickup of online purchases, online visibility of cross-channel inventory and store-based fulfilment of online orders. All of these capabilities are considered vital for seamless retailing."
ETH - Ethan Allen names interim CFO
- "Ethan Allen Interiors Inc. today announced that David Callen, Vice President Finance & Treasurer, has resigned from the Company to pursue another opportunity, effective March 31, 2014."
- "The Company further announced that Corey Whitely, Executive Vice President, Operations, has assumed the additional role of interim Chief Financial Officer and Treasurer. The Company has also appointed John Bedford to the position of Vice President, Corporate Controller serving as the principal accounting officer. Mr. Bedford, 60, joined the Company in February 2008 and previously served as Director Corporate Finance & Reporting and most recently as Sr. Director Corporate Finance & Reporting."
Client Talking Points
US Equity volume is deader than a doornail on the squeeze yesterday (down -20% versus TREND average). Nope, that's definitely not a good thing as front-month VIX (volatility) held Hedgeye TREND support of 14.72, while SPX signals lower-highs of resistance at 1866 now. US consumer prices (CPI) should continue to surprise on the upside this morning with #InflationAccelerating.
Germany broke my TREND support signal line last week and was not able to get back above that (9,273) on the bounce. German Bunds well bid again with the 10-year Bund Yield down 10 basis points month/month to 1.56%. German #GrowthSlowing (on the margin) might be the read-through here.
The UST 10-year yield at 2.67% this morning has confirmed the bearish TREND (2.80% resistance). This makes sense as #InflationAccelerating has slowed US growth here in Q114. Again.
|FIXED INCOME||13%||INTL CURRENCIES||16%|
Top Long Ideas
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
Three for the Road
TWEET OF THE DAY
FX: Yen backs up again vs Burning Buck this morning - $101.19-102.43 risk range vs USD @KeithMcCullough
QUOTE OF THE DAY
"You are never too old to chase your dreams." - Diana Nyad
STAT OF THE DAY
Most people have very little tucked away for retirement, and many aren't even trying to figure out how much they'll need later in life, a new national survey reveals. About 36% of workers have less than $1,000 in savings and investments that could be used for retirement, not counting their primary residence or defined benefits plans such as traditional pensions, and 60% of workers have less than $25,000. (USA Today)
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Hedgeye Expert Call Today - Gaming REITs and Boyd Gaming
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES
Tuesday, March 18
- Hedgeye Expert Call with REIT Attorney Ed Glazer at 11am, Boyd Case Study.
- Please contact email@example.com
Wednesday, March 19
- Galaxy Entertainment: FY 2013 annual results, +1, Pin 705014
- iGaming North America 2014 thru Friday, Planet Hollywood Las Vegas
Thursday, March 20
Friday, March 21
CZR – South Korea approved construction of its first foreign-owned casino for foreign gamblers as Asia’s fourth-largest economy tries to emulate Macau and Singapore in attracting more tourism spending from China. The casino, a joint venture between Las Vegas-based Caesars Entertainment Corp. (CZR) and Lippo Ltd. (226), a Hong Kong-listed property developer, will be built near South Korea’s main Incheon International Airport west of Seoul, South Korea’s tourism ministry said in a briefing today. The ministry granted preliminary approval for the first part of the project that may be worth as much as 2.3 trillion won ($2.2 billion), and will also include hotels and shopping malls. The first phase of Caesar/Lippo’s resort is projected to US$695m with 100 gaming tables, 300 slot machines and 600 hotel rooms. There are 17 casinos in Korea with 16 open only to foreigners; Kangwon Land in Jeongseon, Gangwon Province, is the only one that allows Koreans to enter.
Takeaway: First, given the South Korean governments explicit concerns over potential operators funding concerns, we were surprised Caesar’s received initial approval. Second, we believe the annual potential GGR for a Seoul-based foreigners-only, integrated resort casino is about US$1.0 - $1.2 billion.
South Korea Tourism – South Korea plans to draw 10 million Chinese visitors a year by 2020, compared with 4.3 million last year, an increase of 53 percent from 2012, according to data from Korea Tourism Organization. Chinese visitors made up 36 percent of foreign visitors to Korea in 2013, and accounted for 41 percent of visits to the country’s casinos in 2012, according to the latest official data. All but one of South Korea’s 17 casinos are open only to foreigners. Their combined revenue was KW2.46 trillion in 2012, the latest available data, and attracted 5.4 million bettors. Revenue at foreign-only casinos grew by an average of 15 percent a year for the five years through 2012, the data show.
Takeaway: All Asian tourism efforts continue to focus on the untapped and every growing Chinese consumer, who is looking to be more worldly and Western.
Union Pay Card – The president of the Monetary Authority of Macau (AMCM), Anselmo Teng Lin Seng, refused to comment on the recent report that claimed a large amount of money was smuggled out of China through UnionPay terminals in Macau pawn shops and jewelry stores. He only reiterated that Macau is in line with the international requirement concerning money laundering prevention and claimed that AMCM will continue to closely monitor the situation.
Takeaway: We have been warning investors about the increase chatter regarding money laundering, news headlines, and a potential near-term liquidity squeeze.
Ferrari Land Theme Park – Ferrari and PortAventura Entertainment S.A.U have signed an agreement to build a second Ferrari-themed park, Ferrari Land, as part of the PortAventura resort and theme park outside Barcelona, Spain. Expected to open in 2016, the 7.5 ha (18.5 ac) site is billed as “an opportunity for the whole family to experience and discover the world of Ferrari.” Details have yet to be worked out for the €100 million (US$136 million) park, but Ferrari promises “new and exciting attractions” that will include Europe’s highest and fastest vertical accelerator; a luxury five-star establishment with 250 rooms, restaurants, and a driving simulator; and Formula 1 car exhibits and a slot-car ride.
Takeaway: This will be the second Ferrari Land Theme Park, the first Ferrari World Abu Dhabi opened in 2009. Barcelona is the 10th-most-visited city in the world and the third most visited in Europe after London and Paris, with more than 7.5 million tourists every year. Maybe LVS should have considered Barcelona rather than Madrid.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
This note was originally published at 8am on March 04, 2014 for Hedgeye subscribers.
“Russia is a riddle wrapped in a mystery inside an enigma.”
In college, I wrote my senior essay on constitutionalism in post-Soviet Russia. It was a great topic for an Ivy League kid and I had the privilege of being advised on the paper by General William Odom, a former head of the National Security Council under Ronald Reagan, and expert on Soviet affairs. Despite my heroic efforts at primary research, the conclusion could have been shorter than a tweet.
Simply put, the rule of law was going to take time, perhaps generations, to take hold in Russia. Unlike the United States and many Western nations, the history of Russia, even before Communism, was one of rule “by law” and not rule “of law”. So, in effect, any new Constitution would simply be viewed by the people as an apparatus by which they were ruled, rather than a document that freed them.
Then, as now, it is impossible to analyze Russian action solely from the lens of the West. Actions which may same outrageous to the West may actually be very subdued to the Kremlin.
A quick review of any major Western media source is that there are two schools of thoughts in analyzing the current situation. The first is that Putin is clearly violating the sovereignty of the Ukraine and will pay for it, likely economically. The second is that Obama has largely been incompetent in dealing with Russia and is in a box because Putin has become his partner, of sorts, on Iran and Syria.
Stepping back though, it is worth viewing this from the Russian perspective. For starters, Crimea, which is and has been recognized as a sovereign part of the Ukraine by Russia, is also the home to Russia’s Black Sea Fleet and will be until 2042 under an agreement between the two countries. It is also a region that is almost 60% Russian speaking and ethnic Russian. So, clearly, the Kremlin has vested interests in the Crimean peninsula.
Meanwhile, in overthrowing President Yanukovych, the Ukrainians overthrew a Russian ally who had been moving further away from the Europe and closer to Russian, including taking a recent $15 billion loan from Russia. The current leadership in the Ukraine also does have some far right-wing elements. Specifically, one of the three main leaders of the protest and the new deputy Prime Minister of the Ukraine, Oleh Tyahnybok, is the leader of the far-right ultranationalist Svoboda party that was allied with the Nazis in World War II. (Tyahnybok has at times blamed the Ukraine’s problems on the “Jewish-Russian” mafia running the country.)
Back to the Global Macro Grind...
Clearly, from a Western perspective neither of the above factors, strategic interests in Crimea or extreme nationalists in the new Ukrainian government, justifies an invasion into sovereign Ukraine. Hence, the West is in uproar and among other things is threatening to pull out of the Sochi G-8 conference this summer and implement economic sanctions. For his part, Putin has towed the line closely in Crimea; there have been no shots fired and little violence. As well, so far, the Russians have not made a move into the mainland of Ukraine.
On some level, Putin also likely respects history. Similar to Afghanistan, Crimea has been a thorn in Russia’s side historically. Russia also fought a war in the Crimea, against a British, French and Ottoman coalition, in the middle of the 19th century. This war was an unmitigated disaster for the Russian Empire, then led by Nicholas I. Not only did Nicholas I not live to see the end of the war, but his successor Alexander II signed the Treaty of Paris and initiated the biggest liberalization campaign in the history of Russia.
Despite the fervor that was brewing on political TV this weekend, the perception based on a poll we took yesterday is that the situation in the Ukraine is actually favoring Putin vis-à-vis President Obama. In fact, 78% of the respondents to our poll said Putin will come out stronger. Napoleon famously said:
“Never interrupt your enemy when he is making a mistake.”
Of course, it begs the question: who is making the mistake?
In all likelihood, the most significant reason that Russia is unlikely to escalate is an economic one. Even as the Russian stock market is rallying this morning (perhaps an indication that the worst is behind us?), Russian asset prices have been decimated. In the Chart of the Day, we show this with a chart of the Russian ruble, which is literally hitting all-time lows. Despite the Russian central bank aggressively raising interest rates by 150 basis points, the ruble continues to be better for sale. Internally, a weak ruble is the worst economic outcome for Putin as it has the potential to drive inflation up dramatically.
Externally, the most significant “river card” Russia has to play is its natural resources that much of Western Europe is dependent on. Last year, Russia shipped 133 billion cubic meters of gas to Europe, including 40 billion to Germany, which was more than 1/3 of Germany’s supply. Ultimately, Russia has become very economically integrated with the West and it is likely this integration that leads to resolution before escalation in the Ukraine.
This all of course reminds me of the following joke:
A Ukrainian immigrant goes to the Department of Motor Vehicles to apply for a driver's license.
He has to take an eye test. The clerk shows him a card with the letters:
C Z W I X N O S T A C Z
"Can you read this?" the clerk asks.
“Read it?" the Ukrainian replies, "Heck, I know the guy!"
Our immediate-term Risk Ranges are now as follows (our Top 12 macro ranges are in our Daily Trading Range product):
UST 10yr Yield 2.59-2.73%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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